Malaysia's central bank monetary policy to remain unchanged

Bank Negara Malaysia (BNM) said in a statement that the current level of Overnight Policy Rate (OPR) is accommodative and supportive of economic activity.

The central bank noted that Malaysian economy is expected to register higher growth in 2017.

"Going forward, the more favorable global growth prospects will lead to sustained export performance and generate positive spillovers to the domestic economy. Private consumption will be underpinned by higher wages and employment."

"The improved investment outlook is being driven by new and ongoing infrastructure projects, and stronger capacity expansion in the manufacturing and services sectors," it said.

The Malaysian economy performed better than expected in the first quarter, lifted by stronger domestic demand with additional impetus from exports.

The central bank also noted the global economy continues to strengthen with growth becoming more synchronized across countries.

Risks to the global growth outlook arise mainly from political and policy uncertainties in the major economies, geopolitical and financial market developments, and volatility of commodity prices, it said.

Meanwhile, Malaysia's central bank expects the country's headline inflation to moderate in the second half of the year mainly reflecting the waning effect of global cost factors.

"Underlying inflation, as measured by core inflation, will be sustained by the more robust domestic demand but is expected to remain contained," it said.

Headline inflation moderated to 3.9 percent in May, due mainly to the decline in domestic fuel prices during the month.

The central bank emphasized that Malaysia's domestic financial markets have been resilient.

"The ringgit has remained stable with a more balanced demand and supply of foreign currencies following the implementation of the two financial market development measures.

"Banking system liquidity remains sufficient with financial institutions continuing to operate with strong capital and liquidity buffers. The growth of financing to the private sector has improved, consistent with the pace of economic activity," it said.

BNM has kept its OPR unchanged at 3 percent since July 2016, when it had unexpectedly cut the interest rate by 25 basis points. Its next meeting will be on Sept 7.

Affin Hwang Investment Bank's chief economist Alan Tan said in a report Thursday that he believes that any adjustment of the OPR by Malaysian Central Bank will likely take only in 2018, despite some tightening in monetary policy, especially in the United States.

He said the decision to adjust the policy rate by Malaysian central bank going forward is likely to be data dependent, especially on economic growth, as the recovery in the global economy remains uncertain in 2018.

"Nevertheless, the decision to normalize the rate may also be influenced by the direction of U.S. monetary policy from the current stance," he added.

Singapore's DBS Bank Group Research also said in a report that BNM is in a sweet spot to keep the OPR at 3 percent for the rest of the year with inflation risk easing and growth outlook likely to remain sanguine.

"Receding inflation and a stable growth outlook essentially make for a stable monetary policy," it said.

According to the report, core inflation has remained below policy rate at about 2.5 percent year-to-date.

"Though inflation has surprised on the upside over the past months, it has peaked, and is expected to ease steadily over the course of the year," it said.

The research house expects the overall inflation to register 3.7 percent in 2017 before easing off to 2.5 percent in 2018.

The key driver had been transport inflation, which should ease off in the second half after the low base effect dissipates.

As for the country's gross domestic product (GDP) growth, the research house expects it to hit 5 percent, which is at the upper end of the official forecast range of 4 to 5 percent.

The expectation comes after the country registered a robust expansion of 5.6 percent year-on-year growth, which surpassed the consensus expectation of 4.8 percent.